By Scott Anderson, Ph.D.
Economic optimism surged in the wake of the November election. Consumers and business confidence hit expansion highs as people envisioned substantial business and individual income tax cuts, new infrastructure investment, and a shift toward more deregulation of industry. The nation’s banks were no exception. Weary of the heavy burden and high cost of regulation under the Dodd-Frank Act, and chronically low interest rates throughout this expansion, banks were counting on a number of regulatory reforms under the new administration.
However, six months into the new administration, economic and political reality is finally starting to sink back in. The business and consumer confidence surge has faded, while harder economic indicators like retail sales and industrial production have continued to disappoint.
According the Bureau of Economic Analysis, U.S. real gross domestic product (GDP) growth averaged just 1.9% in the first half of 2017, not far from the expansion’s average 1.8% annual growth rate. Banks too have been scaling back their expectations for far-reaching regulatory reform. The Trump Administration’s low approval ratings, hovering under 40%, and political battles over health care, tax reform, and political scandals, reduce the odds of far-reaching bank regulation reform anytime soon.
What are banks looking for from the new administration?
The Treasury department issued a 150-page report earlier this summer outlining the new administration’s bank regulatory reform priorities, which has received strong praise from bank industry groups.
Rolling back provisions of the Dodd-Frank Act is high on the list. The plan envisions waving Dodd-Frank capital and liquidity requirements for institutions that agree to hold a “sufficiently high” level of capital. Such a law change would especially benefit smaller banks, since they already tend to hold higher levels of capital.
Moreover, Dodd-Frank Act bank stress test thresholds would be raised to reduce the number of banks subject to those requirements. Thresholds for stress testing would start at $50 billion instead of $10 billion today. For “Systemically Important Financial Institutions” (SIFI’s), the nation’s biggest banks, stress tests would be based on the” complexity of the bank holding company” rather than the firm’s asset size. Finally, the qualitative aspect of stress tests would be eliminated.
The Treasury report also calls on Congress to expand the authority of the Financial Stability Oversight Board (FSOB). The FSOB would have the authority to appoint a lead regulator on any issue to reduce fragmentation, overlap, and duplication of regulation.
The banks would like to see more limits on the Consumer Financial Protection Bureau (CFPB). The CFPB, under the Treasury department plan, would be subject to the congressional appropriations process and the CFPB director could be removed by the President or independent commission. Lastly, the Treasury plan called for consolidating regulators and the examination force for community banks and credit unions.
Many of the Treasury Department’s proposals for bank reform dovetail closely with the Republican sponsored Choice Act that passed the House of Representatives earlier this year. However, the Choice Act is expected to die in the Senate and never become law. In the near-term, all the regulatory relief the banking sector can expect is more industry friendly regulatory heads that can ease regulatory burdens at the margin rather than a wholesale rewrite of existing law.
The bank regulatory reforms enacted since the financial crisis have probably made the banking system safer and less prone to collapse under a shock similar to that which befell the banks in 2007 and 2008. Banks have deleveraged and raised capital ratios in response to those added regulations, but stricter bank regulations have also reduced access to credit for some consumers and businesses and added to the sluggish nature of the current economic expansion.
Dr. Scott Anderson, a member of the Treasurer’s Council of Economic Advisors, is Executive Vice President and Chief Economist at Bank of the West. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Treasurer, his office or the State of California.